The New York Times
January 15, 1999


Microsoft Witness Attacked for Contradictory Opinions

Economist Is Said to Have Shifted Stance


WASHINGTON -- A Justice Department lawyer produced several prominent academic papers Thursday that he said showed that the Microsoft Corporation's first witness in its antitrust trial had written opinions contradicting views he has offered in expert testimony for the software giant.

In a broad attack on the witness, Richard L. Schmalensee, an economist at the Massachusetts Institute of Technology, David Boies, the Government's lead trial lawyer, produced evidence that a survey cited by Schmalensee in his testimony actually appeared to be a publicity tool ginned up by Microsoft's chairman, William H. Gates.

In Schmalensee's direct testimony, he wrote that in a recent survey of software developers, "85 percent predicted that Microsoft's integration of Internet functions into Windows would help their company, and 83 percent predicted it would help consumers." He cited the figures to support his own advocacy of those positions.

"Did you ever look at that survey, find out what its purpose was?" Boies asked. When Schmalensee said he had not, Boies asked, "Did anyone ever tell you that the purpose was to give Gates helpful information to use at a Senate hearing" early last year?

Then Boies produced an e-mail message in which Gates wrote last February, "It would HELP ME IMMENSELY to have a survey showing that 90 percent of developers believe that putting the browser into the operating system makes sense," adding, "Ideally we would have a survey before I appear at the Senate on March 3rd."

In a subsequent string of e-mail messages, Microsoft employees laid out how they would pose the questions to get the responses Gates wanted.

Schmalensee said that had he known the origin of the polling information, he would have cited the figures in his testimony anyway, though he might have added "an explanatory phrase."

Schmalensee said Gates's statement "is at least interpretable as a marketing statement."

Through most of the day, Boies worked to tear down Schmalensee's central argument: that Microsoft does not hold significant marketing power and in fact faces real competition in the market for personal computer operating systems.

On Wednesday and today, Schmalensee argued at length that Linux, a free Unix-based operating system, posed a significant near-term threat to Windows, the Microsoft operating system that is shipped on more than on 90 percent of all new computers. He said he came to this conclusion largely from reading newspaper and magazine articles, particularly the computer trade press.

With that, Boies introduced into evidence an article from PC Week online last June in which Gates, in an interview, said that Linux posed no threat to Windows.

"I've never had a customer mention Linux to me," he said.

Schmalensee said Gates's statement "is at least interpretable as a marketing statement."

Schmalensee testified that the small competitors nipping at Microsoft's operating system business should be considered serious threats. And he said that their existence showed that the barriers to entry into the operating system market were not high, so Microsoft should not be viewed as a monopoly power.

But in an article in the Antitrust Law Journal in 1997, Schmalensee wrote: "A clear signal of low barriers to entry is provided only by effective, viable entry" into the market "that takes a nontrivial market share. There is a substantial difference between toehold entry and substantial entry that provides real pressure on established firms' profits."

Schmalensee acknowledged under questioning that no competitor to Microsoft had ever met that test. Still, he argued, Microsoft had behaved and spent research and development money as if it did face competitive threats, particularly from the International Business Machines Corporation, which introduced the unsuccessful OS/2 operating system almost 10 years ago. That, he suggested, put pressure on Microsoft's profits, meeting one of his tests.

"I discussed this with Gates," he said. "He told me about the time when cooperation between Microsoft and I.B.M. ended; I.B.M. said effectively: 'We will bury you.' He took that threat very seriously."

Schmalensee said that Microsoft had spent money on research to counter that threat. But when pressed, he acknowledged that he really had no direct knowledge of that and was only presuming it to be the case.